Chapter 13 - The Costs of Production - Custom Scholars
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# Chapter 13 – The Costs of Production

question
The goal of a firm
maximize profit
question
Total Revenue
-The amount a firm receives for the sale of its output
- TR = P x Q
question
Total Cost
The market value of the inputs a firm uses in production
question
Profit
Total Revenue - Total Cost
question
Explicit costs
Input costs that require an outlay of money by the firm (paying wages to workers)
question
Implicit costs
Input costs that do not require an outlay of money by the firm (opportunity cost of the owner's time)
question
Total cost equation
explicit costs + implicit costs
question
explicit cost of capital
The interest paid every year one borrowed money
question
implicit costs of capital
the opportunity cost of the capital used by a business—the income the owner could have realized from that capital if it had been used in its next best alternative way
question
Accounting profit
total revenue - explicit costs (ignores implicit costs, so higher than economic profit)
question
Economic profit
total revenue - total costs (explicit + implicit costs)
question
Production function
-the relationship between quantity of inputs used to make a good and the quantity of output of that good
-Gets flatter as production rises
question
Marginal product
-the increase in output that arises from an additional unit of input
-Slope of the production function
question
Marginal product of labor (MPL)
The change in total product resulting from a change in the labor input. MPL = dTPL/dL
question
Diminishing marginal product
-the marginal product of an input declines as the quantity of the input increases
-Slope of production function decreases
question
Hiring one extra worker
-Increases output by MPL
-Increases costs by the wage paid
question
Total Cost (TC)
-FC + VC (Fixed costs + Variable costs)
-Total cost of producing a given amount of output
question
Fixed Costs, FC
-Costs that do not vary with the quantity of output produced
-Incur even if production is zero
question
Variable costs, VC
Vary with the quantity of output produced
question
Average fixed cost
fixed cost divided by the quantity of output (FC/Q)
question
Average variable cost
variable cost divided by the quantity of output (VC/Q)
question
Average Total Cost (ATC)
-TC/Q or AFC + AVC
-The cost of the typical unit produced
question
Marginal Cost
-change in total cost / change in quantity
-The increase in total cost that arises from extra unit of production
question
MC < ATC
ATC is falling
question
MC > ATC
ATC is rising
question
The MC curve crosses the ATC curve at
at the ATC curve's minimum
question
Short run (SR)
-Some inputs are fixed (ex: factories, land)
-The costs of these inputs are FC
question
Long run (LR)
- All inputs are variable (ex: firms can build more factories or sell existing ones)
question
In the long run
ATC at any Q is the cost per unit using the most efficient mix of inputs for that Q (ex: the factory size with the lowest ATC)
question
Economies of scale
- Long-run average total cost falls as the quantity of output increases
- Increasing specialization among workers
-More common when Q is low
question
Constant returns to scale
- Long-run average total cost stays the same as the quantity of output changes
question
Diseconomies of scale
- Long-run average total cost rises as quantity of output increases
-Increasing coordination problems in organizations
-More common when Q is high
question
A firm's cost often depend on the time horizon considered
-many costs are fixed in the short-run but variable in the long run
-Average total cost may rise more in the short run than in the long run
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question
The goal of a firm
maximize profit
question
Total Revenue
-The amount a firm receives for the sale of its output
- TR = P x Q
question
Total Cost
The market value of the inputs a firm uses in production
question
Profit
Total Revenue - Total Cost
question
Explicit costs
Input costs that require an outlay of money by the firm (paying wages to workers)
question
Implicit costs
Input costs that do not require an outlay of money by the firm (opportunity cost of the owner's time)
question
Total cost equation
explicit costs + implicit costs
question
explicit cost of capital
The interest paid every year one borrowed money
question
implicit costs of capital
the opportunity cost of the capital used by a business—the income the owner could have realized from that capital if it had been used in its next best alternative way
question
Accounting profit
total revenue - explicit costs (ignores implicit costs, so higher than economic profit)
question
Economic profit
total revenue - total costs (explicit + implicit costs)
question
Production function
-the relationship between quantity of inputs used to make a good and the quantity of output of that good
-Gets flatter as production rises
question
Marginal product
-the increase in output that arises from an additional unit of input
-Slope of the production function
question
Marginal product of labor (MPL)
The change in total product resulting from a change in the labor input. MPL = dTPL/dL
question
Diminishing marginal product
-the marginal product of an input declines as the quantity of the input increases
-Slope of production function decreases
question
Hiring one extra worker
-Increases output by MPL
-Increases costs by the wage paid
question
Total Cost (TC)
-FC + VC (Fixed costs + Variable costs)
-Total cost of producing a given amount of output
question
Fixed Costs, FC
-Costs that do not vary with the quantity of output produced
-Incur even if production is zero
question
Variable costs, VC
Vary with the quantity of output produced
question
Average fixed cost
fixed cost divided by the quantity of output (FC/Q)
question
Average variable cost
variable cost divided by the quantity of output (VC/Q)
question
Average Total Cost (ATC)
-TC/Q or AFC + AVC
-The cost of the typical unit produced
question
Marginal Cost
-change in total cost / change in quantity
-The increase in total cost that arises from extra unit of production
question
MC < ATC
ATC is falling
question
MC > ATC
ATC is rising
question
The MC curve crosses the ATC curve at
at the ATC curve's minimum
question
Short run (SR)
-Some inputs are fixed (ex: factories, land)
-The costs of these inputs are FC
question
Long run (LR)
- All inputs are variable (ex: firms can build more factories or sell existing ones)
question
In the long run
ATC at any Q is the cost per unit using the most efficient mix of inputs for that Q (ex: the factory size with the lowest ATC)
question
Economies of scale
- Long-run average total cost falls as the quantity of output increases
- Increasing specialization among workers
-More common when Q is low
question
Constant returns to scale
- Long-run average total cost stays the same as the quantity of output changes
question
Diseconomies of scale
- Long-run average total cost rises as quantity of output increases
-Increasing coordination problems in organizations
-More common when Q is high
question
A firm's cost often depend on the time horizon considered
-many costs are fixed in the short-run but variable in the long run
-Average total cost may rise more in the short run than in the long run

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